My father in law taught me an exellent idea of investment through Bank fixed deposit.

Make a FD with bank and take loan on that FD and re-FD that loan amount.Repay that loan within a year and take another loan & repeat the cycle.

Eg:Make a FD of 50K with any bank. Interest,take for instance is 8%. Take a loan of 30K on that FD after few days and make another FD of 30K with bank @ 8%. Bank used to charge 2% extra on loan amount ie 10% in this case. I will be paying 10% interest and other side earning 8% on FD.So net impact of loan is 2% only probably cheapest in world.Also my networth increased from 50K to 80K.

After repaying the loan in a year. I can again opt for 30-50 K loan & repeat the cycle. I feel this very attractive option & safety is exteremely high.Such small saving plan may yield better fund in future & house wives can be invloved for these activities & formalities with bank.

Would request you to suggest your view.

SHARE THIS ARTICLE

31 replies on this article “Excellent Plan with Bank FD”

Tax implications aside (as author has done), if you invest 50000 in FD for the 1st year and add 33000 every subsequent year (upto 10th year) to the FD and 33000 at the end of the 10th year (as the author has done), the total investment would be 3,80,000 at the end of 10th year (same as the author of post, at the same timeline), the total return will be 586002.8112 (assuming 8% for FD each year) which is Rs. 8692 more than the spreadsheet calculation. No loan or any complication required.

My Take, FD cannot be a good strategy to make money when we have more better options to make money. That’s also why i pointed the taxation issue which decreases the difference amount. Once people start to move their equity part to debt as part their strategy, they can make use of this on case by case basis.

The strategy is mathematically correct in my opinion but depends on many issues like better investment avenues, banks being dumb in providing 10% loan on their own FD, difficulty in management and FD taxation.

But very strange to see many people got confused by having an idea as N% Loan = N% FD.
N% FD may/always give better return than N% Loan outgo. That’s why there is a huge difference in the percentages offered for the term deposits and the personal loans. Housing Loan Interest rate is a different topic altogether.

The difference this create is in having the money of extra 30000 every year in your hand and repaying the loan at the end of the year makes the difference and compounding this effect to period of 10 years will have significant difference in the final return.

Its just that its too cumbersome to execute and poses the Interest risk in falling interest market.

Also in your initial comment, how you conclude that your networth has increased from 50k to 80k ? You also have the liability of 30k , so your networth stays at 50k only ! .. Just that due to cash flow in future , your networth will increase

Let me give you my views . I can see that this whole strategy is not going to make any monitory benefit , the interest rates paid by you is higher than earned .So from money point of view I cant see much benefit .

But the biggest benefit of this whole thing is that you are creating a structure and just because it gives you a sense of structure and percieved benefit , you are motivated to save more and more money due to this strcture and thats one big reaons you are able to save more money . If this structure was not in place , you might not have done anything and instead would have used the money somewhere else.

Even though there are other good option , because you seem to be a Secure and Safe investment person , you would have just put your money in saving bank accout or would have spent it .

So the contribution of this structure is on your discipline part and from that way you might want to go ahead !

Thanks for your valuable feedback on this. You are 100% right that this scheme develops investment habit which is safe & secured. But as you said monitory benefit is not there in this scheme, i have made a small calculation over a period of 10 years. Benefit is there. Pls check my calcutation details in below link

Dear All
I am not able to post my presentation here in excel format. You all are calculating this as short term plan for one year and finding no benefit. If you wish to get my calcutation based on 10 year may give your mail id so that i can send to you. my mail id is chawda1975@gmail.com

It seems you have not properly scanned my calculation. If you see total investment i have taken over a period of 10 years is Rs 380000 which includes 50000 initial investment , 10×30000 = 300000 loan taken every year & paid back to bank & intrest on loan Rs 30000 paid to bank. After deduction of all profite of Rs 197310 is calculated. You need to repay loan every year and no question of outstanding principal.

No it will be 86400 only as Rs 30000 need to pay from your other regular income as further investment. I have already mentioned in my initial discussion that every year loan need to be paid back to bank. It does not mean that you wlll pay back from FD maturity amount. This scheme builts regular investment habits in secured manner.

Ok, so it is 50k in first year and 30k every year. Calculate the same thing, without this loop-and-hoop scheme.
first year’s iteration:
50k gives you 8% interest amount=4k. At the end of first year, you will have 54k+30k=84k.

Also, you have a net gain of 3400, but your FD value is 86400. The balance does not match overall, which means something is wrong.

Dear All
It seems you all taking this scheme as short term gain whereas it is long term investment plan on continue basis.Also I have previously told you it can be part of overall investment portfolio.

Let me explain :
Take a loan against FD which normal earning person can easily repay within 6-12 months. No need to take higher risk. This is small investment on regular basis which can be done in the name of Housewife or mother to save the tax on interest. I have made a data based presentation for 10 years with minimum return possibility. Here I am not able to paste excel presentation with proper rows & colum marked. It is getting scattered. Hopefully you can try to arrnage for yourself in readable content

Moreover I have calculated interest on loan on simple intrest formula on yearly basis whereas it is actually on reducing balance basis.So total interest will come down & will be added in net surplus. Also if any one can manage to repay loan before 12 months in each cycle may yield more return.

Hopefully I have managed to convience you all that this scheme can manage to give return if followed carefully and gives safe & secured return. Pls do not compare it with return with equity market where we are always in mercy of market conditions & luck. I do agree that it is a bit complicated and need to visit 2-3 times bank in every year. But obvious gain is there. 🙂 🙂

@Dharamesh: I dont see any profit either but I see lot of pain in tracking loans and FDs. Generally (all) banks try to squeeze any meager amount from their clients. Actually Banks make money from these 1% or 2% between their loan with RBI and loans given to their clients’. Like you do between FD and loan.

Hi Ramesh
Yes this formula is already implemented by my father in law and he had developed sound investment out of it. Now he has grown old after fullfilling all his responsibilities with good financial backup.I have posted this just to have views of other members of this website for pro & cons of scheme. May be SIP in MF is better idea provided it give good return. I have portfolio of approx 2 lacs in MF in different scheme since last 5-6 years. Only few have responded well…rest seems junk to sell off. MF have risk factor to gain. No expert can predict any fund in advance that it will be a super hit.whenever any fund performs well expert starts to recommend it. Its just trial & error method of investment.

Would like suggestions for good MF for SIP

Moreover I am not saying above FD scheme is one & all should be in portfolio. This is one of the type of secured investment can be included in overall portfolio. May be some people can come out with better idea.

You are just complicating the way of investing, paying an unncecessary charge of 2%, and investing the 30k in Equity as a lumpsum which is not a good idea.

Instead, we should go for Systematic Investment plan and make the ‘habit’ of investing small amounts steadily (the amount you will be paying for the loan that you took against the FD can be used for investing in SIP)

Hi Karthik
Above given practice develops the habit of investment & gives instant result. For one year return on 50K will not be more than 6% after deduction of loan interest but total net worth of investement after maturity will be 86400 in a year.May be the same can also be done with 50K FD and opening an RD but RD gives somewhat return only opted for 5 years.
Now 36400 can be used for any long term investment in MF or stock market and remaining 50K can be used for FD against to repeate the cycle.